Investing in Health Care: Good Bet or Bad?

Elizabeth Laprade, CFA

Senior Research Analyst

This week’s reader question:

Heading into 2022, what’s your outlook for the health care sector? How are you thinking about investing in health care in the short and long term?

The health care sector has been on a rollercoaster the last two years. In 2020, biotechnology stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. took off as the world focused on the race for a COVID-19 vaccine. This year, as we all moved on to a new normal (or tried to until the Omicron variant raised concerns), the sector has lagged.

If I had to guess, I’d say investors and traders took gains from pandemic bets and lockdown themes (health care, technology, communications) and moved into sectors poised to benefit from reopening. Given that this feels primarily like a sentiment shift, rather than one based on fundamentals, I don’t see any reason to avoid the health care stocks. Plus, valuations look good on both an absolute and relative basis.

Looking ahead, I see a few scenarios that could benefit health care stocks.

The first would be a change in investor sentiment. As favor drifts from the “reopening trade,” it may move toward sectors like health care that have the fundamentals for solid performance unrelated to the pandemic.

A second tailwind is the changes the pandemic brought in the health care system. Society was largely unprepared for a global pandemic—and lessons were learned. This means buying more PPE, accelerating digitization and earmarking funding for drug development and testing.

Support for drug development is a huge boost for biotech companies. Put into context, life-science venture capital funding in 2019 was about $15 billion. In 2020, it jumped to $33.1 billion, and for the first half of 2021 alone it hit $26.7 billion. The more dollars that go into this subsector, the more opportunities there are for companies to succeed by disrupting the medical landscape.

The biggest riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. to certain segments of the health care sector might be the Build Back Better bill, which includes limits on drug pricing and funding for drug development. It’s been passed by the House, but the bill still awaits Senate approval (with inevitable amendments). So, while we remain aware of this potential headwind, we wouldn’t trim our positioning based exclusively on this type of legislative unknown.

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